New to the board--Opinions on paying down mortgage, or boosting retirement

[revisednut]

Hello all, I've been reading through posts the last few hours, and there truly is some great insight and advice on this board.  I'd like to introduce myself, and ask the forum for opinions.  My name is Brad, and I work for a small company that buys/sells/manages mortgage backed securities--I also work a 2nd job at an environmental firm as a consultant.  My personal financial picture:
-27 years old
-BS degree
-Gross Salary (job 1)=$70,000/year
-Gross Bonus (job 1)=$12,000/year
-Gross Salary (job 2)=$20,000/year
-Retirement Contributions
    -35% at job 1 to traditional 401k (will have to tone this down--already $7,400 contributed from job 1--employer match is               $2100/yr total, and fully vested )
    -10% at job 2 (evenly split 5% pre-tax, 5% post-tax)
-Retirement Balances
    -$23k (job 1)
    -$13k (job 2)
    -$8k (job 2--defined contribution plan--no access unless quit/terminated/retire)
-Debts
   -Mortgage 1 (Primary Residence)-UPB=$88k--PITI(and MI) Pmt=$950/mo---24/360 payments in--4% interest--Value=$110k
   -Mortgage 2 (Rental Property)-UPB=$28k--PITI (no MI) Pmt=$385/mo---60/360 payments in--6.25% interest--Value=$85k
   -Mortgage 3 (HELOC-Rental Property)-UPB=$38k--Pmt=$142/mo interest only for 5 more year--4.94% (variable)
-Expenses
   -Mortgage 1=$950/mo
   -Mortgage 2=$385/mo
   -Mortgage 3=$142/mo
   -Phone=$80/mo (non-employer paid portion)
   -Auto Insurance=$600 biannual (paid up front every 6 months)--liability only
   -Gas (auto)=$150/mo
   -Entertainment/Dinner out=$150/mo
   -Netflix=$8/mo
   -Gym Membership=$10/mo
   -Auto registration/inspections/maintenance=$100/mo
   -All other utilities are paid for by my live in girlfriend--she pays the utilities and gives me a bit towards the mortgage
   -$210/mo (out of paycheck) health/dental/vision insurance
 -Net Income (currently)
   -$2400/mo (job 1)
   -$1200/mo (job 2)
   -$600/mo (rental income--my mother is living here, or I'd just as soon sell it)
   -$200/mo contribution towards primary mortgage from live in girlfriend
-Cars (all paid cash--no payments)
   -2001 Hyundai Santa Fe--195k miles (Value=$2,000)
   -2003 Hyundai Santa Fe--175k miles (Value=$3,000)
   -2004 Hyundai Santa Fe--152k miles (Value=$3,500)
   -2002 Mitsubishi Eclipse--150k miles (Value=$1,800)
   -2003 Mitsubishi Eclipse (convertible)--120k miles (Value=$4,000)
-In Summary
   net income=$4,400/mo currently
   net expenses=$2,075/mo currently
(edit)-Emergency Fund--Currently $13k in checking account

I apologize for the long post, but I wanted to paint as detailed a picture as possible looking for assistance.  Moreover, I'm looking for advice on if I should reduce my 401k contributions to max the employer match, and chunk money away at the house debt (and which mortgage should I hit first), or keep maxing out the 401k contributions, and open a roth/Vanguard account for full funding as well, or attempt to do both items simultaneously.  If you made it this far in the post, thank you for reading! 

[jordanread]

My suggestion is to drop the 401(k) down to hit the max annual amount ($17,500) by the end of the year. If you didn't have the current mortgages, I'd say max out what you can put it and then stop contributing, giving it more time throughout the year to grow.
However, that is not the case in this instance. Since you aren't paying anything towards the principal on the HELOC, I'd suggest getting that down as quickly as possible. Once it hits a $0 balance, I assume that the previous interest only payments would adjust, since you didn't maintain the balance in line with the estimate used to calculate those payments. Caveat: Not that familiar with the way the HELOC is set up, so I could be off base.
After that, or before that if I am completely off-base with the HELOC above, putting additional money towards the principal of Mortgage 2 is offering a guaranteed 6.25% return rate, and that seems to be the best bang for your buck, to me. I'll run some calculations, and break it down a bit later, but on initial glance, this seems to be the most efficient use of the money.

[Carrie]

Why do you have five cars?
Personally, I'd max the 401k, fund a Roth to the max and then start knocking out the highest interest rate mortgage & the variable rate mortgage.

[MDM]

Ditto Carrie's advice.  Straightforward and makes sense.

[revisednut]

Why do you have five cars?
Personally, I'd max the 401k, fund a Roth to the max and then start knocking out the highest interest rate mortgage & the variable rate mortgage.

I personally enjoy working on/maintaining the cars.  All were bought for a song and a dance and needed some work.  I can't justify 5 cars--but, I'll try--the 3 SUVs are AWD/4WD, which, on some days, are essential to commute through town during the winter in our ski area.  The thought process of the 3rd is if one breaks down, and while in need of parts there is a backup.  The two cars are driven in the good weather to mitigate the relatively bad gas mileage of the SUVs.  18 MPG vs. 26 MPG, on average.

My suggestion is to drop the 401(k) down to hit the max annual amount ($17,500) by the end of the year. If you didn't have the current mortgages, I'd say max out what you can put it and then stop contributing, giving it more time throughout the year to grow.
However, that is not the case in this instance. Since you aren't paying anything towards the principal on the HELOC, I'd suggest getting that down as quickly as possible. Once it hits a $0 balance, I assume that the previous interest only payments would adjust, since you didn't maintain the balance in line with the estimate used to calculate those payments. Caveat: Not that familiar with the way the HELOC is set up, so I could be off base.
After that, or before that if I am completely off-base with the HELOC above, putting additional money towards the principal of Mortgage 2 is offering a guaranteed 6.25% return rate, and that seems to be the best bang for your buck, to me. I'll run some calculations, and break it down a bit later, but on initial glance, this seems to be the most efficient use of the money.

Your assumption is correct, as the principal is paid down, the payment of interest only will drop, directly related to the new principal balance monthly.  I could likely payoff the 1st mortgage on the rental @ 6.5% within 12 months (less after I drop the 401k contribution.)  I'm leaning towards this method, as I do not see interest rates increasing, that would raise the variable HELOC to a level near the 1st mortgage @ 6.25%

[aj_yooper]

Why do you have five cars?
Personally, I'd max the 401k, fund a Roth to the max and then start knocking out the highest interest rate mortgage & the variable rate mortgage.

^ I think he is starting a car rental agency.  He's ambitious!

Seriously, great detail in your posting.  Impressive income at a young age, 2 jobs, and 2 rentals.  You have it going.

Since you are in a finance biz, can you re-do your rental mortgage to a more favorable rate?  If not, that would be a target for pay down.  I also think you would be wise to reduce the HELOC significantly.  They are callable usually and your rate is not that great.  Can you put a mortgage on the 2nd rental and wipe out the HELOC?  I would also max the 401k. 

[Catbert]

I'd max out your 401k before focusing on mortgages.  I'd probably hit mortgage #2 (highest current interest rate and lowest balance) first.  However, that might depend of how quickly the rate could rise on your HELOC and how lucky I was feeling.   

[revisednut]

Why do you have five cars?
Personally, I'd max the 401k, fund a Roth to the max and then start knocking out the highest interest rate mortgage & the variable rate mortgage.

^ I think he is starting a car rental agency.  He's ambitious!

Seriously, great detail in your posting.  Impressive income at a young age, 2 jobs, and 2 rentals.  You have it going.

Since you are in a finance biz, can you re-do your rental mortgage to a more favorable rate?  If not, that would be a target for pay down.  I also think you would be wise to reduce the HELOC significantly.  They are callable usually and your rate is not that great.  Can you put a mortgage on the 2nd rental and wipe out the HELOC?  I would also max the 401k.

Thank you for the kind words.  I actually only have one rental, of which has a 1st mortgage and a HELOC on it. I don't have enough equity in either property to get a more favorable rate than where I'm at currently.    It is nice to have a backup car to provide friends/family in need when they're lovely brand new lease needs service at the dealer, etc.  Unfortunately the company I work for does very little financing--the little it does is close friends/acquaintances of the CEO and rates are typically 8-12% depending on collateral--so that's a no go. 

[revisednut]

I'd max out your 401k before focusing on mortgages.  I'd probably hit mortgage #2 (highest current interest rate and lowest balance) first.  However, that might depend of how quickly the rate could rise on your HELOC and how lucky I was feeling.

This seems to be the general consensus, and what I am going to crunch some numbers and begin to initiate.  I'll leave the 401k contributions as-is, and should hit the 401k max in June, at which time I'll fully fund a roth at $5500.  Even with current deductions to retirement, I project the ability to payoff the $28k mortgage in approximately 12 months.  Given the circumstances, how much should I keep in my checking account as an emergency fund?  That would kickoff the principal paydown of the subject mortgage. 

[MDM]

If your current job/company is "reasonably secure", then you can keep a reasonably low (1 or 2 months spending) amount in cash.

[Carrie]

I might sell two or three of the cars to accelerate the goal of maxing out a ROTH and get straight on to the mortgage pay down.  I'd probably keep what you already have in your emergency fund, but just not add to it at the moment. 
You're doing a great job.  It'll be even better without all those mortgages!